Strategy: A View From the Top

Chapter 8: Global Strategy Formulation

TEAM 1

JT LehotskyTara Ferguson

Taylor SkidmoreSunny To

Today’s Discussion

1. Globalization and Clustering◦ Macroeconomic perspective

2. Global Strategy Formulation◦ Microeconomic level

3. Global Strategy and Risk

Globalization

Some countries or regions of the world are more efficient than others in producing particular goods.

Examples◦Australian mining◦US agriculture

ClusteringIn the absence of natural

comparative advantages industrial clustering occurs.

If transportation costs are not too high and there is economy of scale a large area can be served from a single location.

Porter’s National Diamond

Factor ConditionsThe degree to which a country’s

endowments match those needed by the industry.

When a particular industry is highly profitable and barriers to entry are low the industry will spread to international borders.

Japanese compete in industries that orginated in the United States.

Demand ConditionsDemand in the home country.

When a large home market develops before it takes hold elsewhere in the world firms have ample incentives to look for business abroad when saturation at home begins to set in.

Japanese motorcycle industry.

Related and Supporting IndustriesThe presence of related and

supporting industries.

Hollywood has a host of suppliers and service providers.

CompetitivenessFive forces of Chapter 4

The more vigorous the domestic competition, the more successful firms are likely to be in competing on a global scale.

Government and ChanceGovernments can change or make

policies to nurture global industries but these policies aren’t always effective.

Chance deals with random events or sheer luck.◦US is the leader in photography

industry is because Kodak and Polaroid creators were born in America.

Industry Globalization DriversMarket Drivers

Evolution of customer needsGlobal ChannelsTransferability

Economic DriversNature of industryEconomies of scale/locationDifferences in country costs

Competitive DriversInterdependence between countries/regionsGlobalization of competitors

Government DriversTrade barriersRegulatory climateTechnology/standards

IndustryGlobalization

Potential

Market DriversHave to meet changing customer

expectations.

Hamburgers in India

Cost DriversIn a growing number of industries, the

minimum sales volume required for cost efficiency is simply no longer available in a single country or region.

Economies of scale and scope; experience effects; and exploiting differences in factor costs for product development, manufacturing, and sourcing in different parts of the world have become critical to global success.

This creates the need for critical mass in different parts of the value chain.

Competitive DriversThe globalization potential of an

industry is influenced by competitive drivers such as:1. The degree to which total industry sales

are made up by export or import volume.2. The diversity of competitors in terms of

their national origin.3. The extent to which major players have

globalized their operations and created an interdependence between their competitive strategies in different parts of the world.

Government DriversCertain industries are

more regulated then others, having a direct influence on a company’s global strategic options.◦ Steel Industry: Trade

policies, technical standards, policies and regulations, and government subsidies.

◦ Google in China

Global Strategy FormulationMultinational- applicable when customer

needs and industry conditions vary considerably from country to country and a high degree of localization is required

International- the importance of managing the international product life cycle through the transfer of technologies to foreign markets.

Global or Transnational- when some degree of standardization in products and services is possible.

Global Strategy DimensionsGlobal strategy formulation

requires analysis of at least five additional dimensions:1. Market Participation2. Standardization/Positioning3. Activity Concentration4. Coordination of Decision Making5. Non-market Factors

1. Market ParticipationFew companies can afford to enter all

markets open to them. They must weigh the relative advantages of a direct or indirect presence in different regions of the world.

A global view requires a multidimensional perspective. Many industries need to distinguish between “must” markets and “nice to be in” markets. Example: Motorola

Developing a global presence also takes time and requires substantial resources.

2. Standardization/PositioningAs globalization advances, many

companies are seeking opportunities to standardize core products and services.

Reducing cost and enhancing quality are primary motivations for standardization.

Adopting a more global market positioning is a another form of standardization◦By applying a global, cost-benefit approach

to formulating marketing strategy, companies seek to balance flexibility with uniformity.

The Global Branding Matrix

Global Mix Global Offer

Global Message

Global Change

Standardized

Tailored

Offer

Standardized

Tailored

Message

The Global Branding MatrixGlobal Mix Strategies- both the offer

and the message are the same.1. A product’s usage patterns and brand

potential are homogeneous on a global scale.

2. Scale and scope cost advantages substantially outweigh the benefits of partial or full adaptation.

3. Competitive circumstances are such that a long-term, sustainable advantage can be secured using a standardized approach.

Global Offer Strategies- apply when the same offer can beneficially be positioned differently in different parts of the world◦Holiday Inn

Global Message Strategies- use the same message worldwide but allow for local adaptation of the offer.◦McDonalds

Global Change Strategies- both the offer and the message are adapted to local market circumstances.

3. Activity Concentration To enhance global competitiveness,

continuously reexamine:1. Which parts of value-creation process they

should perform themselves & which to outsource

2. Whether they can eliminate duplicate operations in different parts of the world & reduce manufacturing sites

3. Whether they can relocate value-added activities to more cost-effective locations

3. Activity ConcentrationSelecting the right level of participation and

location:◦ Factor conditions◦ Presence of supporting industrial activity◦ Nature and location of the demand for the product◦ Industry rivalry◦ Tax consequences◦ Currency and political risks◦ Ability to manage different locations◦ Other elements of overall strategy

Eli Lilly – R&D and clinical trails in India & China◦ Rising development costs - $1.1 billion per drug◦ Phase III test costs - $50 million a year◦ But not all outsourcing

Patients might not be able to afford them Patent protection

Risks of Activity ConcentrationOrganization problemsStaffing problemsIncrease performance risk at a time

when the dependence of one unit on others is increased

Does not necessarily preclude being responsive to local demands◦Rather, decide which value-creation

process should be standardized or concentrated

4. Coordination of Decision Making

The degree to which decision making is coordinated on a global scale defines the extent to which globalization has been implemented successfully

Decisions to be made:◦Which markets to participate in◦How to allocate resources◦How to compete

5. Nonmarket DimensionsGlobal corporate success is influenced

by nonmarket factors that are governed by social, political, and legal arrangements

Different countries have different…◦Political systems◦Economic systems◦Legal systems◦Cultures◦Educational levels◦Skill levels

Have profound implications for the

rules that shape global competition and,

consequently, crafting a global strategy

Mission Statement◦To organize the world’s information and make it

universally accessible and useful.

95+% worldwide revenue comes from online ads when a “Google search” is performed

India – more people are offline; mobile devices outnumber internet connections

http://www.news-relay.com/latest-news/googlecom-has-tweaked-its-global-strategy-for-india/

India Independence logo

International Entry Strategies

Ownership

EntryMode

Low HighEntry Cost

Acquisition / Start-Up

Alliances / Joint Ventures

Licensing

Exports

Region/Country Analysis5 dimension framework to map a

particular country/region’s institutional contexts1. Political and social systems2. Openness3. Product markets4. Labor markets5. Capital markets

How Wal-Mart Went GlobalEvolution from domestic company

into a major global player◦Global Opportunity◦Target Markets◦Mode of Entry◦Global Transfer of Skills◦Local Adaptation◦Local Competition◦Gains and Setbacks

Global OpportunityDecision to “go global” was driven by

need to growConfining itself meant missing out on

96% of world’s potential customers Key success factor – dedicated and

committed workforceLeveraged 2 key resources

◦Developed tremendous buying power with giant domestic suppliers

◦Took advantage of domestically developed knowledge and competencies

Target Markets

Could not simultaneously enter all options outside US

First 5 years◦Concentrated heavily on Americas◦European market was less attractive as

first point of entry Already mature Competitors would retaliate Reduce competitive advantage

◦Asia markets also unattractive Geographically and culturally distant

Mode of EntryCanada – Acquisition

◦Mature market◦Adding new retail capacity was unattractive

Mexico – Greenfield Start-Up◦Significant income and cultural differences

Brazil– Joint Venture◦With Lojas Americana

Argentina – Wholly owned subsidiary◦Success in Brazil◦And only 2 major markets

Global Transfer of SkillsWal-Mart acquired Woolco (Canada)• Sending a transition team Wal-Mart way of

doing business + core competencies• Upgrade to Wal-Mart standards + renovate• Leverage high brand recognition by

introducing “everyday low prices” strategy• Provide a broad merchandise mix, excellent

customer service, and a high in-stock position• Implement employee rewards◦ Profitable and leading discount retailer in 3

years

Local AdaptionWal-Mart and Chinese marketChina:

◦ regulations and government policies: unpredictable◦ Infrastructure: not well-developed◦ Low levels of disposable income◦ Language difference

Hybrid store: supercenter and a warehouse club (memberships)

Smaller satellites stores fit better with local needs

Product sourcing and product selection balance the desire of local for high-status U.S.-made consumer goods and domestic goods

Local CompetitionAcquiring a dominant player.Acquiring a weak player.Launching a frontal attack on the

incumbent.

Acquiring a dominant playerGermany: Wertkauf hypermarket

chain (21 stores, one of the most profitable)

Reason: ◦Mature European market building

new ones not good◦Strict zoning laws precluded

greenfield operations

Acquiring a weak playerRemember the Woolco case?

Launching a frontal attack on the incumbentAttacking dominant and entrenched local

competitors head-onOnly feasible when the global company can

bring a significant competitive advantage to the host country

Brazil 1996: aggressive pricingBackfired when local competitors retaliated

and initiated a price warLeading sale category was food local

sourcing local competitors’ advantageFocus on customer service and merchandise

mix

Gains and Setbacks

Not all of Wal-Mart’s global moves succeeded1999, Asda in Britain (acquiring a dominant

player). Now behind Tesco and gradually fell behind in profit and market share.

2005, costly exit from the German market, loss of $1 billion: unable to attain the economies of scale to beat rivals’ prices

International activities: 40% of the stores <1/4 of total sales

However: only overseas markets offer the world’s biggest retailer the kind of room it needs to grow.

GLOBAL STRATEGY AND RISK

Global Strategy- Exploiting

Similarities and Differences

Political Risk

Legal Risk Financial/Economic Risk

Societal/Cultural Risk

Political RiskPolitically induced actions and policies initiated by

a foreign governmentAssess stability of a country’s current government

and its relationships with others2 subcategories: global and country-specific risk

◦ Global risk: all of a company’s multinational operations◦ Country-specific: a specific country

Macro and micro risk:◦ Macro: how foreign investment in general in a

particular country is affected by reviewing the government’s past use of soft and hard policy instruments

◦ Micro: particular company or group of companies

Legal RiskMultinational companies

encounter in the legal arena in a particular country

Analyzing the foundations of a country’s legal system law properly enforced?

High risk (loss of IP, technology, trademarks…): countries with written laws protecting a multinational's rights but rarely enforce

Financial/Economic RiskAnalogous to operating and financial risk at

homeVolatility of a country’s macroeconomic

performance and the country’s ability to meet its financial obligations directly affect performance

A nation’s currency competitiveness and fluctuation are important indicators of a country’s stability + willingness for changes and innovations

Other factors

Societal/Cultural RiskAssociated with operating in a

different sociocultural environmentEthnics, Religions, Nationalist

movements, Ideologies, Change Adaptability… should be analyzed

Standard of living, patriotism, religious factors, the presence of charismatic leaders…

Exploiting Similarities and DifferencesWal-Mart: global strategy involves

more than taking a superior business model and rolling it out globally to capture economies of scale.

Similarities

Similarities to answer

How much to adapt the business model?

How much to localize to respond to local

differences

How much to standardize from

country to country?

Differences = obstacles to overcome?Global strategies based on the principle of

arbitrage = differences in costs, market structure, or other key variables competitive advantages

Best global strategies exploit opportunities to standardize while differentiate

CEMEX: Mexican global cement producer ◦ Arbitrage cost differences◦ Standardized operational strategy (uniform production

to distribution chains with information technology, innovation)

◦ Choose how to raise capital independently from the way it chooses to compete in product markets

Differences: make arbitrage valuable: comparative advantages

Similarities: create opportunities for scales